Friday, April 13, 2007

As kitchen tables nearly buckle this week beneath receipts, pay stubs, and calculators, Americans must be grateful that tax returns are due only annually. April 17, this year’s deadline, reacquaints Americans with our humongous tax-filing burden. It also suggests a voluntary flat tax as the exit from this morass.

The U.S. tax code should join the Panama Canal and the Channel Tunnel as a wonder of the modern world. Though something only an accountant’s mother could love, it is truly stunning -- grotesquely so.

At 67,204 pages, the tax code and its accompanying regulations and Internal Revenue Service rulings stretch just longer than 71 Gideon Bibles stacked side by side. Even a devout atheist would prefer to read the Old Testament -- 71 times. The Washington-based Tax Foundation counts 1,638 different forms on the IRS’ webpage. Among the more novel: “Casualties and Thefts” (Form 4684), “Suspicious Activity Report – Casinos and Card Clubs” (Form 403), and “Tax for Children Under Age 18 with Investment Income of More Than $1,700” (Form 8615).

Form 1040, of course, is the IRS’ greatest hit. A typical taxpayer needs 37.8 hours to finish this basic tax return.

“Pity the self-employed,” David Keating of the National Taxpayers Union wrote last year. “The IRS estimates they have to spend over 80 hours slaving at their computers to do their taxes, enough to rob them of the equivalent of a two-week paid vacation.”

Among 28 federal agencies the White House studied in its “Information Collection Budget of the United States government,” completing IRS paperwork in 2006 took 6.65 billion hours, fully 3.5 times the 1.89 billion hours needed to fill forms for the U.S. Treasury (sans IRS), the other 14 Cabinet departments, and 13 major independent agencies combined -- including the red-tape-spewing Environmental Protection Agency, Federal Communications Commission, and Securities and Exchange Commission. The Tax Foundation calculates that IRS paperwork-compliance cost Americans $265.1 billion in 2005. This was essentially a 22% surcharge atop each tax dollar confiscated.

Even worse, nobody knows what all this means. USA Today recently picked four tax professionals to create returns for the imaginary Bailey family. They generated four different amounts for taxes owed. In 1998, Money magazine asked 46 tax pros to file for another hypothetical household. These experts gave Money 46 different tax-liability figures, varying from $34,240 to $68,912.

As NTU’s Keating concluded: “The Tax Code is so convoluted that no one inside or outside the IRS understands it.”

There is a better way.

Americans deserve a voluntary flat tax. Those Americans who love this gargantuan tax code, its multiple rates, and baroque intricacies, should be free to keep filing form after form, if that makes them happy. Those who prefer a flat rate with few if any deductions, should be free to choose a postcard that would ask one’s name, address, income, and a simple calculation for, say, 17% thereof.

Politically, a voluntary flat tax would let issue-starved Republicans and conservatives avoid a wrestling match with Democrats and liberals over keeping or scrapping the charitable or home-mortgage deductions. Instead, the right can argue for giving Americans the freedom to select between two available systems. The sales slogan is simple: “It’s your tax. It’s your choice.” Let the left argue against granting Americans that option. The right can win that fight.

Next year, Utahns will choose between either a traditional, six-bracket tax (from 2.3% to 6.98%) with exemptions and write-offs, or a simple 5.35% flat tax without deductions.

The Beehive State will join Estonia, Slovakia, and Ukraine, all of whose economies the flat tax has energized. On January 1, 2001, Russia jettisoned its three-bracket system and its 30% top rate on incomes above $5,000. Instead, it embraced a 13% flat-rate tax.

“Before the flat tax, most salaries were paid as cash under the table,” says Yuri Mamchur, director of the Seattle-based Discovery Institute’s Real Russia Project. “That almost has disappeared.”

“The low flat rate contributed to the decline in capital flight [and] improved taxpayer compliance,” according to Hoover Institution economist Alvin Rabushka. Tax evasion has gone the way of the Gulag. Since the flat tax, revenues have swelled 128% after inflation.

If the flat tax is good enough for the former Evil Empire, it’s good enough to offer America’s embattled taxpayers.